Purchasing an Annuity Can Affect Your Whole Portfolio

Inflation-Protected Annuities: There are Pros and Cons

Annuities have been around for centuries: Reportedly, savvy investors in ancient Rome would make one-time payments to an “annua” contract and receive income payments once a year for the rest of their lives.

Today, annuities have bells and whistles, but the concept is the same: You make a payment to an insurance company, either by lump sum or installments, and in exchange, the insurance company pays you a stream of income for a specified period or for life.

With a fixed annuity, the annuity owner is guaranteed at least a minimum rate of investment return, allowing him or her to plan on a guaranteed income stream.

Today, however, annuities come in a number of different forms. One of these is the inflation-protected annuity, which guarantees a real rate of return at or above the rate of inflation. The downside: With the inflation-protected annuity, initial payments are usually smaller than they would be otherwise.

Also, few US life insurance companies offer true inflation-protected annuities, because it’s difficult to gauge inflation risk. However, you can buy an annuity with pre-determined annual increases in the amount of annuity payments, such as 3 percent per year for the life of the contract.

This may be important to you, because even at a moderate annual inflation rate of 4 percent, the purchasing power of the dollar erodes quickly; by half in 15 years, if some economists are to be believed.

If an inflation-protected annuity is of interest to you, your advisor can provide you with information and advice.


Purchasing an Annuity Can Affect Your Whole Portfolio

There are annuities available to meet the needs of each individual. Among these are deferred and immediate annuities. While these two annuity types are popular choices for some, you need to decide if they are right for you.

Here are some factors to consider:

What’s the difference?

With a deferred annuity, assets accumulate tax deferred until distributions are made, usually during retirement. With an immediate annuity, the contract owner starts receiving payments right away. Both are available in the form of fixed annuities, which distribute income in guaranteed amounts.

Deferred fixed annuities:

  • Are purchased either with a single premium or periodic payments;
  • Allow the contract owner to determine the point at which the accumulated principal and earnings convert into a stream of income;
  • Guarantee that the contract owner will earn a stated rate of interest during the accumulation phase and receive a defined amount of income on a regular schedule when the contract is annuitized;
  • Allow payments to be made for a specified number of years or life.

Immediate fixed annuities:

  • Are purchased with a single lump sum and income payments begin within a short period, usually less than 13 months;
  • Have income payments that are pre-determined on a regular schedule;
  • Allow payments to be made for a specified number of years or life.

Deferred fixed annuities have been generally more popular. In 2011(the most recent full-year statistics available), total sales of deferred fixed annuities were worth $67.1 billion, and that compares favorably to $8.5 billion in sales of immediate fixed annuities sales for the same period.

That said, the annuity you choose is dependent on your individual financial circumstances and goals, not on what is more popular. Before you purchase any annuity, consult your advisor, who can help you make a decision that’s right for you.

Recipe: Banana “Ice Cream” with Caramel Sauce

Serves 4

  • 4 medium bananas
  • 1/3 cup candied or toasted nuts (optional)
  • 1/2 cup light brown sugar
  • 2 tablespoons butter
  • 2 tablespoons light corn syrup
  • 1/8 teaspoon salt
  • 1/4 cup heavy cream
  • 1 teaspoon vanilla extract

Directions

Peel the ripe bananas. Slice, place in a single layer on a plate and freeze for a couple of hours.

Meanwhile, make caramel sauce by combining sugar, butter, syrup and salt in a small saucepan. Over a medium-to-low heat, stir until blended (about three minutes), then bring to a gentle boil for two minutes. Remove from heat and stir in cream and vanilla. Let cool then cover and refrigerate.

To make “ice cream,” place frozen bananas in a food processor and process until it has the consistency of soft ice cream, scraping down the sides of the bowl occasionally.

Stir in nuts and serve with sauce.

November 21st, 2014 by Lightship Insurance